Asymmetries in the Firm's Use of Debt to Changing Market Values

35 Pages Posted: 19 Jun 2017

See all articles by Stephen P. Ferris

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance

Jan Hanousek

CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute); Charles University in Prague; Academy of Sciences of the Czech Republic; Centre for Economic Policy Research (CEPR)

Anastasiya Shamshur

University of Kent

Jiri Tresl

University of Mannheim; Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2017

Abstract

Using a large sample of U.S. firms over the period, 1984 to 2013, this study examines the relation between market and book leverage ratios. Unlike Welch (2004) who contends that changes in market leverage do not induce adjustments in book leverage, we find an asymmetric effect. That is, firms adjust their book leverage relative to market leverage only when the changes in market leverage are due to increases in the value of the firm's equity. No adjustment is observed when firm equity values decrease. We observe a number of interesting differences between those firms that make large and small capital structure adjustments in response to changing equity prices. Our results are consistent with Barclay, Morellec and Smith (2006) who argue that the optimal level of debt decreases in the presence of corporate growth options.

Keywords: market leverage; book leverage; capital structure; adjustment speed

JEL Classification: C23, G32

Suggested Citation

Ferris, Stephen P. and Hanousek, Jan and Shamshur, Anastasiya and Tresl, Jiri, Asymmetries in the Firm's Use of Debt to Changing Market Values (June 2017). CEPR Discussion Paper No. DP12099, Available at SSRN: https://ssrn.com/abstract=2988858

Stephen P. Ferris (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

214 Middlebush Hall
Columbia, MO 65211
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Jan Hanousek

CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

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Charles University in Prague ( email )

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Academy of Sciences of the Czech Republic ( email )

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Czech Republic

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Anastasiya Shamshur

University of Kent ( email )

Sibson
Canterbury, Kent CT2 7NZ
United Kingdom

Jiri Tresl

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

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